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Why buying a car will be more expensive from tomorrow

Joanna Faith
Written By:
Joanna Faith

The way vehicle tax is calculated for cars is changing from 1 April 2017 and it will increase the purchase price and running costs of most new vehicles.

The new scheme, which comes into force tomorrow, is based on a vehicle’s carbon dioxide (CO2) emissions and list price.

Under the current system, rates are split into bands so that the higher the CO2 emissions, the more tax you’ll pay. Low emission cars that emit less than 100g/km of CO2 are exempt from Vehicle Excise Duty (VED).

However, the new scheme, which applies to all new vehicles registered on or after 1 April 2017, means only zero emission cars – so electric and hydrogen cars – will be exempt from VED.

For all other cars, first year rates of VED range from £10 to £2,000 according to the car’s CO2 emissions.

A standard rate of £140 will apply in all subsequent years.

Cars with a list price in excess of £40,000 will incur a supplement of £310 on their standard rate for the first five years.  This will include electric and other zero emission cars.

VED bands and rates for cars first registered on or after 1 April 2017

ved rates

All cars registered before 1 April 2017 will remain in the current VED system, which will not change.

Matt Sanders from Gocompare.com Money said: “In recent years, car engines have become more eco-friendly, so the number of models qualifying under the present system for road-tax exemption has grown significantly – reducing the amount payable to the Treasury.

“The incoming road-tax scheme, like the current system, is intended to favour buyers of less polluting cars.  However, only zero-emissions cars will remain fully VED exempt, and only if they cost less than £40,000. This is a big change and it will add to the cost of certain cars post-April.”

For motorists thinking about buying a new car, Gocompare.com Money outlines the different options available:


Depending on your financial situation and the car you want to buy, paying cash can be the cheapest way to buy a new car.  Some dealers offer cash discounts, and owning the car outright means you don’t have to worry about meeting monthly repayments or incurring interest.

On the downside, you are investing in a depreciating asset. Depending on the price, running costs and quality, new cars typically lose between 50% and 60% of their value over the first three years.

Personal loan

A personal loan allows you to spread the cost of a new car and allows you to negotiate with the dealer on price. You also have the flexibility to choose the loan period but the longer the term of the loan, the more interest owed.

Buying a car with a personal loan enables you to own it outright (the car isn’t secured against you defaulting on the loan), so if needed, you could sell the car before the end of the loan period.  However, the interest rate you will be offered will depend on your credit history. People with a poor credit rating will be charged a higher rate of interest or may find it hard to get a loan. And remember, you are borrowing money to purchase a depreciating asset.    

Credit card

Paying by credit card can be a cost effective way of buying a new car. For example, a 0% purchase credit card allows you to spread the cost of the car and if you repay the balance within the interest-free period, you are effectively benefiting from a 0% loan. Remember once the 0% period expires you’ll be expected to pay back the balance with interest so make sure you consider this before paying by credit card.

Credit card purchases are covered by ‘section 75’ of the Consumer Credit Act, which means the card company has equal responsibility (or ‘liability’) with the seller if there’s a breach of contract or misrepresentation when buying goods such as a car. “Section 75” gives credit card users extra protection when something goes wrong but it comes with exceptions, such as marketplace sites.

However, not all dealers accept credit cards and others may charge a credit card handling fee which will increase the cost of the car. You will need a good credit rating to get the best interest rates and sufficient credit limit.

Hire purchase deals

After paying a deposit of typically around 10%, you pay monthly instalments, which cover the cost of the car plus interest, for the duration of the agreement. A hire purchase deal, subject to you meeting the lender’s criteria, can enable you to borrow a larger sum of money than is available under a personal loan. The finance company ‘buys’ the car and ‘takes it’ as security meaning that you do not own the car until the loan has been repaid. If you default on the payments the lender can repossess the car.  You are unable to sell the car until the loan has been repaid.

Personal Contract Purchase (PCP)

A finance company buys the car and you pay a deposit and monthly instalments to use it until the contract expires.  At the start of the contract, the finance company gives the car a guaranteed final value (GFV). The GFV will depend on the deposit paid, your monthly instalments and annual mileage. At the end of the contract, you have the option to make a payment equalling the GFV and take full ownership of the car, hand the car back to settle the remaining finance or if the car is worth more than the GFV – use the difference in value as a deposit towards another car.  Payments under a PCP can be lower than for other types of car finance. A PCP allows you to drive a new car every few years without owning it (if you don’t want to).     

PCP contracts impose a mileage limit and penalties apply if you exceed it. Over the term of the PCP you may have only paid off the car’s depreciation so at the end of the contract you will not have any equity in the car. PCP can work out as an expensive route to car ownership – so it’s important to calculate the total cost of the deposit, GFV and monthly payments. A PCP is usually more expensive than a hire purchase deal, with larger deposits and monthly repayments.


A personal leasing arrangement allows you to drive a new car for an agreed period and number of miles – without owning it. Leasing arrangements may include other costs such as servicing, tax and insurance. Without the need to buy or sell a car – changing vehicles is easier under a personal leasing arrangement. Monthly payments tend to be lower. The leasing company bears the cost of the car’s depreciation. No matter how long you lease the car for, you won’t own it. A mileage limit usually applies, with penalties for exceeding it, and you may face extra fees for any damage or wear and tear to the car.